You may be in the process of topping up your tax-free savings account or TFSA with the additional $5,000 contribution permitted for 2010. However, have you designated a beneficiary on your TFSA account? Designating a beneficiary is a smart thing to do in most circumstances to potentially reduce income taxes and probate fees payable upon your death. Probate fees are generally payable on all assets that form part of your estate at death other than items with named beneficiaries such as life insurance policies, RRSPs and TFSAs.

TFSAs
TFSAs were brought into effect by the federal government in 2009 and provide that any income earned on the funds in the account is tax free, even when it is withdrawn from the account. As of 2010, the most you can contribute to your account without a penalty is $10,000, but the plan allows for up to an additional $5,000 contribution for each successive year. At the moment your TFSA may seem like a small amount of money to worry about upon your death, but if you continue to contribute each year, this may soon be a substantial asset in your portfolio.

Here is what to think about when considering a beneficiary for your TFSA:

Designating a “Successor Holder” (for spouses)
If you decide to designate a beneficiary, there are two choices. The first is to designate a “successor holder”. This can only be done in favour of a spouse (or common law partner). This type of designation allows your spouse to take over the TFSA upon your death and preserves the ability of the funds in the TFSA to earn income tax-free. The spouse cannot make further contributions to your TFSA, but can either maintain it and designate a new beneficiary, or transfer it over to his or her own TFSA without affecting his or her own contribution room. This will also prevent your estate from being required to pay probate fees on the TFSA funds (currently approximately 1.4% in British Columbia). This is normally the best choice if you have a spouse.

Designating a “Designated Beneficiary”
The second choice is to provide for a “designated beneficiary” such as a child or sibling or any other person. This type of designation allows the person named to receive the proceeds of your TFSA (either in cash or in kind) upon your death, but the TFSA itself will cease to exist. This designation does not preserve the tax-free status of the TFSA, other than for income earned prior to your death. Income earned in the TFSA after the date of death will be taxable to the beneficiary. However, making the designation will prevent your estate from paying probate fees on the value of the TFSA.

No Beneficiary Designation
The third option is to refrain from providing for a “successor holder” or “designated beneficiary”. This will result in the proceeds of the TFSA being paid out to the beneficiaries of your estate. There may be reasons why you wish the TFSA proceeds to be paid out pursuant to the terms of your Will, such as if you have a trust in the Will for minor children or disabled beneficiaries. In that case, you may not want the TFSA funds to go directly to the beneficiary pursuant to the designation, but may rather want to ensure you have made provision for a trust in your Will and have the funds be paid into that trust. You should consult a lawyer with respect to this type of planning to ensure that it is right for your circumstances. Under this option, probate fees will be payable on the funds from the TFSA, but this may be outweighed by the benefits of having the funds go into the trust where they would be managed appropriately for a minor or other beneficiary. This will also prevent the involvement of the Public Guardian and Trustee, who would need to step in to hold funds in trust for any minor or disabled beneficiary who inherits funds directly from a TFSA.

More information on TFSAs, including how to make a designation, is available at the federal government website: http://www.tfsa.gc.ca/thingstoknow-eng.html or from your financial institution.